Annuities consultation – what might happen?
The Government’s current consultation exercise on access to annuities will be of great interest to Independent Financial Advisors. Although the Government is considering increasing the scope of PensionWise the proposed changes are very complex and there is likely to be a big demand for regulated advice. Since the value of any annuity will be, at least in part, based on longevity and morbidity assessments, IFAs with experience in the protection sector will be well placed to enter this market. The consultation ties itself in knots about how to get a competitive market, even suggesting that customers will be required to get a certain number of quotes. For me, the solution is to make regulated advice compulsory – just as it is for other complex areas like long-term care. The other option is a kind of social insurance based solution with a central mechanism for determining annuity values.
In essence, the way the system will work is that, if an individual wishes to access their annuity (eg to get a lump sum) the annuity will be assigned to another party. The individual gets the lump sum from that party and that party gets the income from the annuity that would have been paid to the individual. The first question is what if the annuity provider doesn’t want to change the existing arrangement? As the consultation stands, that will be down to them. Assuming the next Government wants to progress this reform an obvious change would be to give the customer “the right to sell”.
The next issue is who should be able to enter into an agreement with the customer. The consultation envisages a wide range of organisations with two exceptions. First, retail investors will not be allowed to enter this market. I think this is designed to prevent the sort of scandals that have affected the life settlement market in the USA. However I suppose there is little to prevent packaging of investment portfolios that could include assigned annuities. One for the FCA. Second, annuity holders will not be able to access the value of their annuity by agreeing to terminate their contract with their existing annuity provider This is controversial. It is quite possible to make the case that an existing annuity provider may well have more information on the client than a new one (saving underwriting costs). The case is strongest for those who purchased impaired and enhanced annuities.
The consultation then moves into some weird territory concerning notification of death. How will the existing provider know if a customer has died given that the contact with the customer will be with a third party (if at all)? A central death register is ruled out for now but the alternative of “let the market resolve it” may not be sufficient. In addition, what about annuities where other parties have an interest, for example the customer’s spouse? This is easier as at the point of annuity assignment the annuity provider will be in direct contact with the customer and so the onus can be on them to resolve this.
Finally there is a rather mean minded approach to consumers who are in receipt of benefit. The consultation suggests that they should not be allowed to access their annuities as the income they get from them is offset against their benefits. Instead the Government should treat them like bonds – if you get an income then that is taken into account and if you cash them in it is treated as capital.
Fine-tuning the detail of annuities policy is going to consume a lot of time, and it is not clear yet down which roads the major issues will be taken.
Written by SAMI Fellow Richard Walsh. First published in Cover Magazine, April 2015